Michael Hudson on the Federal Reserve System

By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City and a research associate at the Levy Economics Institute of Bard College

An interview with Michael Hudson published on the Russian website Terra America (TA).

What is the place of the Federal Reserve System in the American financial and economic structure?

Prior to the Federal Reserve’s founding in 1913, U.S. monetary policy was conducted by the Treasury. Like the Fed, it had district sub-treasuries that performed nearly all the financial functions that the Fed later took over: providing credit to move the crops in autumn, managing government debt, and so forth.

But after the severe 1907 financial crisis, a National Monetary Commission was reformed. Under the then-Republican administration, it recognized a need for more active government intervention to prevent future financial crises. It also recognized the desirability of moving away from the Anglo-Dutch-American system of “merchant banking” based on short-term lending against collateral in place, or for shipping of goods already produced. The National Monetary Commission’s longest volumes were on the great German industrial banks, and Republican policy aimed at bringing banking into the industrial era, to provide long-term funding after the model of German and other Central European banks.

However, the leading bankers sought to use the crisis as an opportunity to grab power for Wall Street, away from the Treasury. In this sense, the Fed was founded in large part to take monetary control away from Washington’s elected officials and appointees, and privatize the supply of money and credit.

So its place in the U.S. financial and economic structure is to allocate credit, primarily to serve Wall Street financial interests. That explains the insistence on the financial class here and abroad in insisting on an “independent” central bank. It means that instead of serving the public interest, it serves the interests of the banking class. The hoped-for transformation of commercial banking into long-term industrial banking was not achieved.

Can we imagine the global economic system without Federal Reserve today? If yes/no, why?

As David Kinley’s book for the National Monetary Commission pointed out a century ago, nearly all the financial functions performed by the Fed already were performed by the national Treasury. In more recent times, Milton Friedman and his University of Chicago colleagues suggested that the entire Fed could be reduced to a single desk inside the Treasury. The “Chicago Plan” of the 1930s urged Treasury control, as does Congressman Dennis Kucinich’s current bank reform.

There is no inherent need for a monetary agency to exist outside of the national government, except to serve the interests of the financial class as distinct from those of government, industry and labor. And the banking sector’s business plan is to load down real estate, labor, industry and the government with as much interest-bearing debt as possible.

Some people in the US (especially supporters of the congressman Ron Paul) believe that the Federal Reserve is the reason of serious problems within the American financial system. Do you agree with this claim?

The Fed is a reason for serious problems, but not the only reason. Unfortunately, Ron Paul’s proposal opposes paper credit itself, whether issued by the Fed or the Treasury. He wants to return to the gold standard and clash government spending – in effect, to create an economy without government. So what he actually advocates is not only the end of the Fed, but the end of a functioning credit and tax system. The idea is otherworldly and has no possible chance of being enacted, because it would cause a vast debt default as a result of plunging prices, incomes and employment.

Contrary to most of European central banks the Federal Reserve is quite autonomous and has some private aspects. Doesn’t it give too much power to this financial structure? Or maybe this power is part of the checks and balances within the American political system? If yes, what is its precise role and place?

The Federal Reserve is private in name only. Its heads are appointed by Washington, but Wall Street has veto power over it (as it has over the appointment of major Treasury and other regulatory agency officials). So the problem is not that the Fed is technically owned by its stockholders, but that Wall Street has gained overpowering control over government itself.

The financial sector has sought to dismantle checks and balances, making it protect Wall Street even as financial interests diverge from the promoting of economic growth and rising living standards.

What is the priority for the Fed leadership: solving national American problems or serving the interests of the global system?

The Fed is officially supposed to perform two functions: First, to promote “price stability.” This means in practice, fight against wage inflation and preserve sufficient unemployment so that wages will not increase. The “prices” that are supposed to stabilize are the price of labor (wages) and commodity prices.

Meanwhile, the Fed seeks to inflate asset prices, above all real estate prices. Under Alan Greenspan, the aim of the Bubble Economy was to inflate housing prices by enough so that homeowners could borrow the interest to pay the bankers each year, and even enough to spend on consumer goods that their stagnant wage levels were not sufficient to buy. The result was to vastly increase the volume of debt – and debt service became a rising element of prices throughout the economy. Debt-leveraged housing prices ended up absorbing about 40 percent of typical family budgets, and a rising share of corporate income as well, leaving less for spending on current production of consumer goods and capital goods.

The second function the Fed was supposed to perform was to promote full employment. Mr. Greenspan made it clear that he believes that this is incompatible with the ideal of price stability. He pointed out before Congress that the virtue of loading down homeowners, college students and others with debt was that they were afraid to go on strike or even complain about working conditions or seek higher wages, for fear of being fired and missing a mortgage payment or credit-card payment. Going on strike or losing as job would threaten them with loss of a home, and an immediate increase in the credit-card interest rates and penalties that they had to pay. So the Fed became the leading administrator in Wall Street’s war against labor.

Under Mr. Greenspan’s tenure and that of his successor, Ben Bernanke, the Fed has overseen the greatest shift of wealth n American history since the Robber Barons.

Finally, the Fed has taken over the functions of government by threatening to close down the economy if the government does not bail out the banks at taxpayer expense, and protect the wealthy 1% against losing money.

How different were the three last Fed chairmen? Who was the most successful?

Paul Volker came from the Chase Manhattan Bank. In the late 1970s he coped with the U.S. balance-of-payments deficit (stemming mainly from overseas military spending) and consequent the inflationary pressures by raising interest rates to 20%, thereby plunging stock market and real estate prices.

His successor, Alan Greenspan, was a Wall Street lobbyist and a follower of Ayn Rand. Diametrically opposite from Paul Volcker, he pressed to deregulate the economy and sponsored the financial bubble to pump enough credit (debt) into the economy to enable debtors to pay the banks the interest that was mounting up. As a bank lobbyist in control of the banking system, he “freed” the bank from government control – and promoted the greatest debt bubble in U.S. history.

Ben Bernanke was an academic, not a banker but sufficiently brainwashed in neoliberal, pro-Wall Street ideology to be trusted by the banks to flood the economy with credit in an attempt to re-inflate the bubble economy so as to pull real estate prices out of negative equity – thereby saving the banks from their bad loans. Instead of writing down debts, the Fed made sure that no bank would lose, or even be prosecuted for the financial fraud that has risen to epic proportions over the past decade. My UMKC colleague Prof. Bill Black calls this phenomenon “criminogenic.” So in effect, Mr. Bernanke is as much a bank lobbyist as Mr. Greenspan.

In this sense, both Mr. Greenspan and Mr. Bernanke were successful in steering U.S. financial policy to benefit Wall Street by loading down the economy with debt, and then using public credit to bail out the banks and pass the losses onto taxpayers. But this “success” is leaving the U.S. economy debt-ridden and uncompetitive internationally, because its industrial producers face such heavy debt charges that they are priced out of world markets for most products except for military arms, agriculture and high-technology monopoly goods and patented motion pictures and entertainment.

The existence of the Federal Reserve: does it match with the ideas of the classical liberalism? How liberal is this institution?

The Federal Reserve is antithetical to the classical liberal aim of using financial and tax policy to minimize the economy’s cost of production. From the Physiocrats and Adam Smith through Ricardo, John Stuart Mill and the Reform Era, the aim was to minimize land rent (by either taxing it away or nationalizing the land), monopoly rent (by price regulation or by keeping natural monopolies in the public domain) and interest or other financial charges that were payments for special privilege.

Acting on behalf of the banks, the Fed has sponsored the un-taxing of real estate and monopolies, as these have become the major bank customers. And by deregulating Wall Street, the Fed has underwritten the overgrowth of unproductive credit – credit extended not to finance industrial capital formation, but simply to speculate and to transfer ownership of assets already in existence.

The guiding philosophy of the Fed is to inflate prices of assets in order to expand the market for real estate loans (which account for some 80 percent of bank loans in the United States), corporate takeover loans and speculative “casino capitalist” loans for foreign-currency and interest-rate arbitrage.

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60 comments

  1. R Foreman

    Somehow I don’t think Bernanke was successful at pulling ‘real estate prices out of negative equity’. I suspect those prices will continue falling to a point where people can pay cash for homes.

    Bernanke and the Treasury+Political/Financial elite have pitted themselves diametrically against the 99%. It’s really just a question of time before the sovereign debt bubble blows.

    What happens then is anybody’s guess.. probably something similar to the 1789 French Revolution, or perhaps a Syria-like crackdown and blood-letting. The difference here is that the populace is well armed, but still, it will be somewhat disorganized mayhem. The US military will be the largest gang with the biggest guns.

    1. SidFinster

      Bernanke is failing in his mission to inflate asset prices because the Minsky-ian bad debt overhang is destroying money faster than the Fed can print it.

      1. sgt_doom

        The one thing I’m absolutely certain about the Fed, is that everytime I hear a former governor pontificate about something, they certainly don’t appear to know enought to locate their own genitals.

        Frederic Mishkin gets paid for doing a completely crap job on a report about obvious banking fraud in Iceland — which Mishkin completely misses and which they arrested the previous president ’cause he refused to arrest the obvious crooks — then Mishkin changes the effing name of the report — thus proving he’s not only an Ignoramus Americans, but a complete and total LIAR!

        Next, the outstanding Mark Pittman, sadly deceased journalist once at Bloomberg News, made those FOIA requests to the Fed to allow us to see what a complete and total liar the Inspector General of the Federal Reserve System turned out to be when we go back and review her testimony in front of then-Representative Alan Grayson.

        Too many liars and crooks at the Fed — proof positive it’s overdue for their arrests.

  2. Daniel de Paris

    A great post. I thought that Yves had turned libertarian.

    “Unfortunately, Ron Paul’s proposal opposes paper credit itself, whether issued by the Fed or the Treasury. He wants to return to the gold standard and clash government spending – in effect, to create an economy without government. So what he actually advocates is not only the end of the Fed, but the end of a functioning credit and tax system.”

    Not exactly libertarian sure! Those with a distance to politics will have noted that, prior to 1913, there was no no US government neither a “working credit system” (sic).

    I leave this conclusion to Michael Hudson.

    This re-writing of history and over-simplification of Ron Paul’s positions is not exactly a fact-based one. But I do not expect it here from a site that has progressively evolved from an analytical framework to a political standpoint.

    This is a quite honourable position by the way. Especially in view of the fact that the US is running into some sort of permanent election period. But you’d better know:)

  3. vlade

    “It means that instead of serving the public interest, it serves the interests of the banking class”
    This subtly implies it would have been better if Treasury was doing it. Yeah, right. Who happens to be there at the moment?

    On a broader scale, implications that “all would be better if just government run it” are exactly as false as “all would be better if there was no government and free market only”.

    Human tendency is to create positive feedback loops – and it matters absolutely not whether in economy, politics or whatever. As long as there’s no hard and fast natural law (say gravity), we’ll go and happily PFL.

    1. steelhead23

      Vlade, You are correct – and wrong at the same time. As a matter of fact, I would not wish to have Mr. Timothy Geithner setting monetary policy (although I suspect it would vary very little from the current Fed’s policies). But Mr. Hudson is imagining the U.S. as a democracy, where if politically-driven monetary policy was harming the citizenry (say by creating too much inflation), the public could throw the bums out. As long as, through their wealth, the elite control the electoral process, bankster sycophants will dominate the U.S. Congress and POTUS. Like Mr. Hudson said – the Fed is a problem, it is not the problem.

  4. Mansoor H . Khan

    Michael Hudson said:

    “There is no inherent need for a monetary agency to exist outside of the national government, except to serve the interests of the financial class as distinct from those of government, industry and labor. And the banking sector’s business plan is to load down real estate, labor, industry and the government with as much interest-bearing debt as possible.”

    Exactly:

    Here is how the banker’s game works:

    http://aquinums-razor.blogspot.com/2011/11/here-is-how-bankers-game-works.html

    It is not FED that is main problem. It is the Private Commercial Banks and other Shadow Banks who effectively issue U.S. Currency (dollars) by creating bank deposits.

    The system should be reformed such that:

    1. Abolish all government backed deposit insurance schemes. This will make it very difficult for private institutions to issue U.S. Currency (but it will not completely stop them from doing so).

    2. No lender of last resort (i.e., government bailout of any kind for any private bank.

    3. Provide safe money storage in bank deposit form for the public including check clearing.

    Mansoor H. Khan

    1. Bank Examiner Extraordinaire

      But will banks still allow me access to their books so that I may choose a safe institution to open my checking account?

    2. reason

      i.e. The banking equivalent of a public option in medical insurance.

      Seems I misjudged you. This is not a bad idea.

    3. Benedict@Large

      “… the Private Commercial Banks and other Shadow Banks … effectively issue U.S. Currency (dollars) by creating bank deposits.”

      OR … The banks et al, UPON YOUR AUTHORIZATION when you sign the mortgage (or other loan) note, issue currency. So it is actually YOU who are issuing the currency because the bank can’t do a thing without your signature.

      What? You don’t like it phrased that way because now instead of the banks being the assholes, the borrowers are?

      In fact, it’s neither formulation. If either the borrower or lender could actually create money, then whomever could, could never be forced into default. What happens instead is that the consolidated (Fed + Treasury) central bank actually issues the new money, accepting in return a pledge of collateral provided jointly by the lender and borrower. This is why (and the only way) the borrower and/or lender can be forced into insolvency if/when the loan ceases to perform.

  5. Blissex

    «The Federal Reserve is private in name only. Its heads are appointed by Washington,»

    This is a gross oversimplification, based on confusing the Federal Reserve System, which is in essence a trade association, and the Federal Reserve Board, which is in essence a government agency, similarly to the FCC.

    There is some overlap as the main function of the Federal Reserve System branch of NY is to act as the operational arm of the Federal Reserve Board, and some of the Federal Reserve Board members are from the Federal Reserve System.

    I think I made a decent summary of how things are here:

    http://www.ritholtz.com/blog/2011/12/happy-anniversary-alan-greenspans-irrational-exuberance/#comment-598735

    1. joebhed

      “” The Federal Reserve is private in name only. Its heads are appointed by Washington,””

      Actually I believe that is a mistake on Prof Hudson’s part, or someone scribing here.
      It does not make any sense in the context in which it is presented.

      The “Federal Reserve” is NOT private in name at all.
      I believe he meant to say that it was Federal, or ‘public’ in name only.

      Read as its opposite:

      “”The Federal Reserve is PUBLIC in name only. Its heads are appointed by Washington, but Wall Street has veto power over it (as it has over the appointment of major Treasury and other regulatory agency officials). So the problem is not that the Fed is technically owned by its stockholders, but that Wall Street has gained overpowering control over government itself.””

      That is NOT private in name only.
      That is private from skin to core.
      Thanks.

  6. Jim Haygood

    ‘[Greenspan] pointed out before Congress that the virtue of loading down homeowners, college students and others with debt was that they were afraid to go on strike or even complain about working conditions or seek higher wages, for fear of being fired and missing a mortgage payment or credit-card payment.’

    This is the essence of neofeudalism. Go out and protest, get an arrest record, miss a payment, lose your job, and you could quickly end up unemployable and homeless — since employers and landlords routinely do background checks of criminal and credit history. Like a medieval serf, you’d better not talk back to your lord and master.

    As Richard Kline pointed out last week, this system is much more efficient at extracting rent than 19th century chattel slavery, since it transfers risk to the serfs themselves.

    In saying that ‘the Fed has sponsored the un-taxing of real estate,’ Michael Hudson evidently is referring to the still real estate-friendly U.S. tax code. But at the local level, real estate taxes have become confiscatory. A modest house in a middle-class suburb of New York can easily incur $10,000 to $15,000 in annual property taxes.

    In other words, after a lifetime of workin’ the fields, shopping at the company store, and paying usurious interest, you can never get yourself free and clear cuz the tax you have to pay to Ol’ Massa on your slave shack just keep goin’ up …

  7. Outlander

    That is a very, very simplify view of what is FED, he is a typical economist talking just about economy. And we are talking about the total whole…. How to lead a crowding world with huge consuming differences and nuclear weapons… sad read people with so narrow mind.

  8. fresno dan

    What I have read is the the point of the Federal Reserve is to prevent financial panics, and that prior to the Federal Reserve you could scarely walk down the street without a bank collapsing.
    So…..
    1929 – big massive collapse
    1940 to 1970 – everything seems ok
    1970’s – stagflation
    1970 to curent – stagnant wages
    2007 – big collapse

    Is that really a big improvement over what the Treasury could have done???

    1. Mansoor H. Khan

      fresno dan said:

      “you could scarely walk down the street without a bank collapsing.”

      “Is that really a big improvement over what the Treasury could have done???”

      That is why in the above comment I said:

      3. Provide safe money storage in bank deposit form for the public including check clearing.

      The government needs to provide a safe storage of deposit money (i.e., a non-lending government bank for risk free electronic storage of money).

      mansoor h. khan

          1. Mansoor H. Khan

            The check clearing has to be performed by the government.

            Control of the check clearing process is what allows the private bankers to play musical chairs with government created cash and leverage 20 to 50 times on it.

            mansoor h. khan

    2. sgt_doom

      Great dates in history, but please don’t forget:

      1920, passage of Prohibition to profit the banksters (who funded said legislation) with their involvement in untaxed liquor distribution, smuggling and money laundering through the stock exchange; and,

      1980s/90s, passage of NAFTA, which the banksters funded to profit them with the privatization of the Mexican banking system, thus affording them profit from drug money laundering of untaxed drug distribution and smuggling.

      Sound about right?

  9. F. Beard

    He wants to return to the gold standard and clash government spending – in effect, to create an economy without government. Michael Hudson

    Not quite. Those in favor of a gold standard ARE in favor of government – to enforce the gold standard. Thus “libertarians” in favor of a gold standard are hypocrites.

    The solution to the money problem is coexisting government and private money supplies per Matthew 22:16-22. Government money should only be legal tender for government debts and private monies should only be acceptable for private debts.

    1. mac

      Let us leave the Bible out of this. We have quite enough problems without adding in religion.

      1. F. Beard

        Nope. It’s the Bible that forbids usury between fellow countrymen and counterfeiting – the basis of our money system and the source of our problems. And if you want to defeat the so-called “Religious” Right you had best know their supposed religious guide.

        Btw, the Bible also commands periodic debt forgiveness and restitution for theft. We certainly need one or both.

  10. Ellis

    Does anyone believe that Goldman Sachs, Citigroup, Ally Bank, JP Morgan Chase would be any less rapacious if the Fed didn’t exist? Does anyone believe that the U.S. Treasury is any less tied to the banks than the Fed? Y’all are just talking about rearranging the deck chairs on the Titanic.

    1. F. Beard

      Does anyone believe that the U.S. Treasury is any less tied to the banks than the Fed? Ellis

      You have things backwards. The banks depend on government. How could they even exist without:

      1) A lender of last resort
      2) Government deposit insurance
      3) Legal tender laws for private debts
      4) Federal borrowing?

      Banking should be an entirely private business assuming it could survive as such. But it isn’t so we have banker fascism in the US.

  11. Susan the other

    Michael Hudson compared the Anglo-Dutch-American “commercial” or mercantile bank model – the short term lending model – against Germany’s industrial banking model which was “long term.” This was most interesting to me. We have been short-term forever and we finally came to the end of profit taking for the banks because they themselves couldn’t afford the financial frenzy and the inflation that went along with it. Bernanke is dedicated to wringing labor-inflation out of the system. But I don’t know how pumping money to the banks to raise asset prices for the country helps the overall inflation picture. Just makes the poor poorer, I guess.

    Back to Hudson: if we took up with the long-term “industrial” banking model, and put it under the aegis of the Treasury without the influence of the private banks, we would maintain lower interest rates and stand by our own economy. We could lead it in the greenest and most responsible directions if it weren’t constantly bankrupted by private banking usury.

    And one more point about which I know nothing, but anyway: I don’t understand why we can’t have sufficient money in circulation to achieve well-being for all Americans. Who cares if money gets printed up in the trillions if trillions are what we need to make our economy function.

    1. citizendave

      Who cares if money gets printed up in the trillions if trillions are what we need to make our economy function – STO

      Before resorting to adding money to the system, maybe we could get the money already in the system to circulate more freely. In the current scheme, money seems to be making a one-way trip, to the coffers of the 1%. If the 1% won’t cooperate voluntarily, should the role of government be to break that logjam via taxation, to get the current money supply to flow freely and rapidly into the hands of the 99%, the unemployed, the working poor, and the middle class? If the supposedly independent (arm’s length) Fed can’t or won’t manage it, then should the role of Congress be to change the tax laws to rebalance the system in favor of the vast majority of citizens?

      Michael Hudson makes it clear that the current Fed favors a high unemployment rate because it favors business and financial interests over the interests of working people. This is why it’s so frustrating to have Congress in thrall to Big Money. They are abdicating their proper role as representatives of the people. Congress could act as a counterbalance to the monetary policy of the Federal Reserve. This logic seems to explain why people such as Representative Kucinich want to put the Federal Reserve under direct control of Treasury, back into the public sphere, so that monetary policy would be made to work to the advantage of the people. If we can’t do anything about the Fed’s monetary policy, and if we had a Congress that represents the people, we could pry loose some cash from those who are hoarding way more than their fair share. If we had some cheese, we could make a cheese sandwich, if we had some bread.

    2. sgt_doom

      The one thing for sure I know about Prof. Hudson is that he’s been right for the past 40 years.

      Comparisons are odious, sayeth Voltaire, but no one can compare with Professor H.

  12. dirtbagger

    During the 19th century, there were financial crises about every 20 years (1819, 1837, 1857, 1873, 1893). After creation of the Fed, there have been less financial crises during the subsequent 100 years.

    Does anyone have a learned opinion as to whether the 19th century crises could have been lessened in either frequency or severity if a structure such as the Fed had been in place in 1800? At face value, the comparison of financial crises between the 19th and 20th century seems to be an argument in favor of the Fed.

    1. falun bong

      You might have a look at the book “The Creature From Jekyll Island”. Very flawed style but lots of good history of banking in the 17th, 18th, 19th and 20th century.

    2. Do Something To The Fed

      The pat answer is they blamed the gold standard for the financial crisis and recessions of the 1900s.

      Delving a bit deeper, the economy was 70% Ag and small farmers did it. They had loans payable in gold, but if you had a good year prices fell, and if you had a bad year you had no product to sell. So you deflated relative to your gold loan and the bank would take you over. The other unasked question is would things have been any different if you had a fixed rate fiat loan and no bank would re-fi it going into a recession with the Federal Reserve lowering interest rates, or local bad weather, or falling prices. Then lets throw in the possibility that banks may act predatory and get you no matter what?

      The is also much evidence that banking regulation sucked in the 1900s and compliance was very much lacking.

      But that doesn’t mean many economists today just blame the gold stantard for the 1900s and proclaim Central Banking as our saviors.

      There are other reasons why the gold standard is impractical today. For one, we reached Peak Gold in 2004, so it would naturally constrict the monetary base. That frightens economists to death, worse than a space alien invasion. (not me so much) The other is that governments or central banks don’t have enough of it and the only way for them to get it and make the numbers work is to steal it.

      I think the far more interesting question was raised by Volker a couple years ago. He asked why have financial crisis and recessions increased in the past couple decades or so and are in fact happening more frequently than the 1900s.

      I think he and many people here suspect why that may be.

  13. Hugh

    Michael Hudson says much that needs to be said. We live in a kleptocracy. So whether the Fed is “independent” or under the Treasury doesn’t matter because we in the 99% are screwed either way. In a non-kleptocracy, the functions of the Fed should be under the Treasury, and banks should be run as public utilities.

  14. Paul Tioxon

    “by deregulating Wall Street, the Fed has underwritten the overgrowth of unproductive credit – credit extended not to finance industrial capital formation, but simply to speculate and to transfer ownership of assets already in existence.

    The guiding philosophy of the Fed is to inflate prices of assets in order to expand the market for real estate loans (which account for some 80 percent of bank loans in the United States), corporate takeover loans and speculative “casino capitalist” loans for foreign-currency and interest-rate arbitrage.” From the last 2 para of Mr Hudson.

    What is unproductive credit? Cui bono is always operative. Capitalism was and is not about industrialization, high technology. Since the material needs of humanity have been conquered by factory production exceeding our capacity to consume, the capitalist has overcome that barrier to slowing profits making by the current wave of financialization the source of profits. As Lee Iaocca pointed out, he was not here to make cars, he was here to make money. Capitalists were not here to make the Industrial Revolution, but to profit from it. Now, they make more profits from synthetic derivatives than from the state of the art of Solyndra Solar Electric panel factory. Even though that would have been good for cleansing the air of asthma causing carcinogenic gasoline particulates as part of the electric vehicle infrastructure.

    The solution for capitalism is to use the republic to overcome its obstacles and resolve whatever crisis occurs, even the endogenous crisis rising as a direct consequence of the operation of the financial system in its usual profit making mode. It is productive, for itself and itself only. It is the endless pursuit of profits as productive as ever, until it is not. Boom and Bust. And then political rescue, using the mechanism of the state to facilitate.

  15. steelhead23

    I have read a lot of blog entries by MMTers and Minskyists and have seen numerous arguments that the money supply and debt should not grow faster than the GDP. If debt is growing faster than GDP, these bloggers would recommend that the Fed rate be increased and if debt is growing slower than GDP, rates should be decreased. Since I struggle to fully grasp Keen’s family of differential equations he uses to define the function of debt in the economy, I can hardly develop a mathematical proof, but I believe that GDP is the wrong indicator. A staggering fraction of total GDP is the FIRE industry, which enjoys outsized wealth and seems capable of growing at the expense of the productive economy. Hence, there would be a certain amount of correlation between the growth of GDP and the growth of debt, that is, they covary. Instead of debt, I would suggest that one should compare the growth of wages to the growth of debt when determining monetary policy. My rational is that it is wages which pay debts – the higher the average wage the higher the debt capacity of the system. I would also suggest that due to the large income disparity in the U.S. and the continued income growth of the elite while median wages stagnate, that the median wage trajectory should be compared to debt growth when setting monetary policy.

    I am hoping that either Steve Keen, Mr. Hudson, or others would read this blog and critique this suggestion.

  16. falun bong

    Seems to me that banks are just another industry, like textiles or cigarette manufacturers. Their business is to sell their product, which in their case is debt. If they’re really successful, they sell their customer (US Govt, individuals, and corps) so much debt it can’t be repaid, so then they get the interest payments and the collateral. Nice business.
    I’d put them in the category “necessary, but dangerous if uncontrolled”. Just like the military. So some checks and balances would be prudent, as the Founding Fathers clearly recognized.
    The problem is that the current received wisdom, started by Reagan with the air traffic controllers, is that any government regulation is somehow despicable and anti-capitalist. So we dismantled Glass-Steagall, de-funded the SEC, and ignored the War Powers Act.
    Such irony, because our desire for hyper-capitalism and freedom has instead reaped anti-Socialism and tyranny. The banks get Socialist largesse and the taxpayer gets the hyper-capitalist losses. And of course Permanent War, which the bankers always love because it makes their biggest customers (governments) borrow with complete abandon.
    The banks’ real trick, accomplished over decades, has been convincing people that their industry is somehow mission critical to the functioning of society. It culminates with Hank Paulson blackmailing the US Congress/people for *$700 billion* with just a three-page memo. Stunning.
    Can we fight back? First thing will be to prick the perceptions bubble. Seems to me that process has started. More and more people are getting up the learning curve thanks in part to sites like NC.

    1. F. Beard

      I’d put them [banks = counterfeiters] in the category “necessary, but dangerous if uncontrolled”. falun bong

      Banks/usury are not needed at all. Common stock as private money allows the necessary consolidation of capital for economies of scale.

      “The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks.” Lord Acton

  17. TedWa

    Ok Michael, I stopped reading when you go out of your way to lambaste Ron Paul by claiming he wants a gold standard and no paper money??!!

    He’s stated over and over again that the Federal Reserve can not be gotten rid of overnight and that it will take years to get rid of them. He hasn’t been for a gold standard in quite a while, do some homework before you lay false claims so carelessly and callously on someone! He’s for a “COMPETING CURRENCY” to the Federal Reserve debt notes, along the lines of JFK’s silver certificates. Their issuance did not roil world markets! And he thinks the money should be based on a “basket of goods” including precious metals to damp down the manipulation that would occur under a gold standard alone. If you’re going to bear false witness at least get your facts straight.
    Now I’ll go read the rest of the article.

    1. F. Beard

      He’s for a “COMPETING CURRENCY” to the Federal Reserve debt notes, along the lines of JFK’s silver certificates. TedWa

      Ron Paul’s idea of competing currencies all involve scarce, easily cornered commodities that require usury to generate a return.

      But aside from that, RP is attacking the problem the wrong way. We should NEVER attempt to define what private money is; that is up to a true free market in private money creation. Instead, we should only define what government money is. And that definition should be that government money is inexpensive fiat that is ONLY legal tender, de jure and de facto for government debts, not private ones.

      1. TedWa

        “We should NEVER attempt to define what private money is; that is up to a true free market in private money creation.”

        Until we get a free market, one that is free for the consumer by not being a burden on the taxpayer, we need to define our way out of this debt based monetary system. Isn’t it obvious that the goal of the Federal Reserve is to take the value of the dollar to zero and thereby destroy our democracy and national sovereignty???

        Ron is suggest a long term transition to a freer market. He knows it can’t happen overnight. And why do you think that the basket has to contain scarce and easily cornered markets? If the basket contain only scarce materials, how would we know when those resources are being manipulated??

        1. F. Beard

          Isn’t it obvious that the goal of the Federal Reserve is to take the value of the dollar to zero and thereby destroy our democracy and national sovereignty??? TedWa

          So abolish the Fed and let US Notes be legal tender for government debts only AFTER a universal bailout of the entire population till all debt to the counterfeiting cartel, the banks, is paid off.

          Also, RP and gang are so sensitive to theft by monetary inflation that they ignore or justify theft by monetary deflation.

          1. TedWa

            Thanks for your response. But I’m curious, how does monetary deflation cause a transfer of wealth? Wouldn’t it just cause a settling of the funds already lost/transferred by inflation?

            In the great depression the prices of everything fell 20-30%. Everything. Thanks to Bernanke and targeted inflation the things we need cost more and the things we don’t need cost less. In that way people in the GD had it better than we have it now. Home prices fell in the GD 22% – here and now they’ve fallen 33% and are expected to fall further.

            The Great recession of 1920 was over in 2 years because of liquidation of debt.

          2. F. Beard

            But I’m curious, how does monetary deflation cause a transfer of wealth? TedWa

            By requiring that debts be paid back with money that has more purchasing power than what was lent.

          3. F. Beard

            In the great depression the prices of everything fell 20-30% TedWa

            So what if you’ve lost your job or your wages have been cut 20-30%?

    2. steelhead23

      Ted, I hope you recognize that Hudson’s swipe at Ron Paul was not a major point in this essay. I suspect that because Ron Paul is the face of the Fed-criticizers, Hudson simply wanted to distance his criticism from Ron Paul’s proposals, not to detail his criticisms of those proposals.

      However, let’s join hands and sing a little Kumbya here. You see, Mr. Paul is WAY to the right of Mr. Hudson and yet it is these outliers, folks well to the left and right of the mainstream, who recognize that the system is currently working to the benefit of the elite at the expense of the middle class and very likely posterity. I find it simply fascinating that Ron Paul and Dennis Kucinich have both proposed sovereign coinage and federalizing the Federal Reserve System. Left and right seem to agree that the status quo is untenable. The establishment has been coopted by the elite.

      Frankly, if the elections were tomorrow and Ron Paul was the Republican candidate – I would choose Paul for this one simple fact – he understands that current Fed policy favors the elite and harms the rest of us. Obama is hopeless.

      1. Carla

        Very well said. I could not go so far as to vote for Ron Paul, but still, well said indeed.

      2. TedWa

        That’s why I said back to reading the article after I corrected the author on RP’s stance. You’re right, Obama doesn’t have an economic clue and doesn’t want one. By using taxpayer bailouts they are making us unwilling accomplices in the past, present and on-going banksters crimes. Unwilling, but just as complict. The war being waged on the working class citizens by Wall St and (by association) our government will continue unabated if Obama, Mitt or Rick are elected – and so will the wars and empire building. Personally, Ron Paul is the only one I can vote for with a clear conscience. And if he doesn’t win the nomination, I’m going to write him in.

  18. Schofield

    Sounds as though Alan Greenspan worked for the Banksters by helping load up non-government and government sectors with as much interest bearing debt as possible. A sort of modern day equivalent of helping run an extortion racket for The Mob.

  19. Sharkie

    The Federal Reserve is on borrowed time. If they weren’t issued a 99 year charter, they should have been and we would have been rid of them by decree and all the lost faith in truth and justice might rekindle. But the Fed Century is devolving much like a rotting blight along the countryside. Here very little confidence remain and for obvious reason.
    The ingrained habit or belief the fiat USD has value is being crushed by the very debt instrument it has become. The trust that this debt would be repaid and discipline in Fed creation of fiat USD lent it value, but as an astounded public has witnessed this is not happening. Once unheard of stimulus and federal borrowing along with abysmal FRB money creation has in a large sense, a sense so many people are just beginning to understand, rendered fiat USD to valueless. That’s why you see gold coming forward. That’s why you are taxed 28% capital gains on precious metal sales, because you picked the right currency and they know all of this.
    Anyway, by not trying to make this a rant I suppose I have accomplished just that but the point is all this talk about a gold standard and there is not enough gold and television spots where they frantically are asking to buy your gold and the Federal Reserve Chairman coming out and saying how awful gold is and has been and all that, it’s a ploy. The belief the fiat USD has value is the ploy, and to your credit, you are finally seeing this for what it is: The very long end of a very dysfunctional monetary system, a collapse of a belief system that has endured 99 years.
    Full faith and credit indeed.

    1. F. Beard

      That’s why you are taxed 28% capital gains on precious metal sales, … Sharkie

      The capital gains tax should be abolished but not just on PMs. Common stock is an ideal private money form that requires no usury or PMs. Common stock “shares” wealth and power rather than concentrates them as usury based money forms such as PMs do.

      BTW, where is Ron Paul on common stock as a private money form?

  20. freeman

    The paper totally ignores what I believe to be the true purpose of the Fed: to act as a front and distraction for fractional-reserve lending – which amounts to the creation of money out of thin air by private corporations, i.e. counterfeiting.

    In the Chicago Fed paper, Modern Monetary Mechanics, the Fed admits that private corporations create the vast proportion of ‘money’ in our system. See the Credit River case as well. That is the true power created by the Fed for the banks.

    1. joebhed

      “”The paper totally ignores what I believe to be the true purpose of the Fed: to act as a front and distraction for fractional-reserve lending – which amounts to the creation of money out of thin air by private corporations, i.e. counterfeiting.””

      I have to totally agree with you, but in a slightly different way.

      It was the federal “reserve” context that was supposed to restore confidence and trust in the banking system after the 1907 CRASH.
      In reality, there are no reserves.
      What you are calling a front for fractional-reserve banking is, IN REALITY, a front for issuing all of the nation’s money as a debt.

      It is the private privilege of issuing the circulating medium of the national economy AS A DEBT, that has fractured our financial and economic stability.
      One would think the Minsky followers would get this eventually.

      There’s no need to focus on either fractional-reserves, or full-reserves or zero-reserves. Focus on NON-RESERVE based public money issuance.

      We will thus end their debt-based paradigm.
      http://youtu.be/geQdFxrnWHE

      It’s all in the Kucinich Bill.
      kucinich.house.gov/UploadedFiles/NEED_Act_FINAL_112th.pdf

      The debt-free-at-issuance Money System Common.
      Thanks.

  21. Sharkie

    I think golden fiat already exist. Paper gold and physical will part company. Credit is doing it’s swan song, and it will once again require trust and dicipline for currency to exist.

    1. F. Beard

      Credit is doing it’s swan song, and it will once again require trust and dicipline for currency to exist. Sharkie

      So we should yoke the government money creation rate to the mining rate of gold? And only those with gold should be able to make the rules? I think not. That is both stupid AND fascist.

      The required discipline should be accomplished by ensuring that fiat is only de facto legal tender for government debts, not private ones, AFTER a universal and equal bailout of the population, including non-debtors, till all debt to the counterfeiters, the banks, is paid off.

      As for credit creation, that is a form of counterfeiting and should either be illegal or at least all government privileges for the banks should be abolished.

  22. Chauncey Gardiner

    Thank you for your insightful post, Dr. Hudson. In considering the many power levers that are available to the large global investment banks, I had the following thoughts regarding their pervasiveness:

    1.) Fed/FRBNY controls creation, issuance, distribution, regulation, surveillance and control over money… who receives it and who retains it, and who thereby controls wealth and resources in our society.

    2.) Derivatives volumes and super-priority in bankruptcy enables their issuers to dictate perpetual QE-ZIRP going forward.

    3.) Control over a majority of the Supreme Court: Citizens United enables their control of executive branch, legislators, regulatory agencies, and key government offices at the state and local levels.

    4.) Control of large corporations through their senior executives by controlling stock, bond and futures markets; thereby enabling manipulation of stock and bond prices, the value of stock options, IPOs, interest rates, raw materials costs, etc.

    5.) Control of corporate owned media and the FCC enables propaganda and message control. Limitations on concentration of ownership need to be re-enacted.

    6.) The field of Economics, where the Fed is the academic gatekeeper, needs to be opened up.

    There are obviously many other arms of this Hydra. Who will be Achilles? And what are the alternative visions besides the current bipolar Gold vs. Fed debate that I see reflected in comments above? How about a different form of money entirely, such as green energy btu’s produced?… or a different Fed ownership structure, such as one share granted to each citizen over 21 years of age for life?… I am sure others would have many suggestions of value if the conversation were to be given space.

  23. Sharkie

    So we should yoke the government money creation rate to the mining rate of gold? And only those with gold should be able to make the rules? I think not. That is both stupid AND fascist. Beard

    Try not to make this complicated. We’ve had that. It doesn’t have to be gold, although gold has been a currency for some time. The good news is the ingrained habit has hit a wall, and people like you know it. As far as credit, let’s just say paying for things as you go create no enemies.

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